[Rancid]

Well, more likely in a vault than at home. Point is, physical cash pays no interest, positive or negative. It could be abolished or tracked or whatever, but politically that is currently not feasible.

I feel like something is getting confounded here. What are we even talking about now? Interest, or inflation/deflation, and why?

Are you suggesting that physical money stashed in a vault is not subject to inflation/deflation? Because that is not true.

[Puffer Fish]

It's fact, not deduction.

That happened repeatedly in the 1800s. I would guess that this would push the value of gold up, but prob a lot slower than needed. And if you made a way for gold to fluctuate quickly, I would also guess that would create other problems.

Or maybe people, as a group, are just stupid and so often don't really truly understand economics or the complex phenomena happening around them.

Look, I think we can all agree that if you printed up and gave out a new dollar to everyone who already had a dollar, it would pretty much do nothing for the economy overall.
(Other than perhaps people would briefly think they had more wealth than they actually did)

Basically same sort of thing with gold coin.

[late]

Look, I think we can all agree that if you printed up and gave out a new dollar to everyone who already had a dollar, it would pretty much do nothing for the economy overall.
(Other than perhaps people would briefly think they had more wealth than they actually did)

Basically same sort of thing with gold coin.

Unlike Republican tax cuts, people would spend it and that would provide a small stimulus.

With gold, you'd be giving more than a dollar. The Gold Rush added a lot of gold to the economy, and that helped.

[Puffer Fish]

Unlike Republican tax cuts, people would spend it and that would provide a small stimulus.

With gold, you'd be giving more than a dollar. The Gold Rush added a lot of gold to the economy, and that helped.

I can't believe I'm having this discussion.

And yet, I recall hearing these same sort of views casually stated as fact in at least two historical documentaries, and also know that there was a big movement in the US with these sort of views in the late 1800s.
So these views aren't crazy in the sense that there are and have been many other people who believe them.

But it's illogical. Think about it.

Wealth doesn't come from money, money is the medium of exchange. Print more money, you just get inflation.

Maybe the gold rush was able to redistribute some of the existing wealth, or maybe it allowed the US to start buying more things from other countries.
An economy isn't going to become more prosperous just because you add more gold coins.

And look, I am not in any way arguing against using gold as the medium of exchange. That's a separate topic. I'm just saying these views of yours are wrong, a fundamentally nonsensical. And for all those anecdotal historical examples, there are alternate economic explanations. Gold made places wealthy because they could buy stuff from outside.

If one area doesn't have a lot of gold to use as a medium of exchange, the scarce gold they do have just becomes more valuable. You sell something for 1 gold coin instead of 3.

[late]

Maybe the gold rush was able to redistribute some of the existing wealth, or maybe it allowed the US to start buying more things from other countries.
An economy isn't going to become more prosperous just because you add more gold coins.

I'm just saying these views of yours are wrong, a fundamentally nonsensical. And for all those anecdotal historical examples, there are alternate economic explanations.

That's what mainstream economists think.

A growing economy needs more money. "Most economists now agree 90 percent of the reason why the U.S. got out of the Great Depression was the break with gold,” said Liaquat Ahamed, author of the book Lords of Finance."
https://www.mentalfloss.com/article/12715/why-did-us-abandon-gold-standard

(Lords of Fiance is terrific, btw)

[Puffer Fish]

That's what mainstream economists think.

A growing economy needs more money. "Most economists now agree 90 percent of the reason why the U.S. got out of the Great Depression was the break with gold,” said Liaquat Ahamed, author of the book Lords of Finance."

That's very biased. I'm going to point out that economic scholars are very much divided into partisan camps, with different beliefs and economic ideologies.

It's not the objective science many in the public think it is.

There's a couple of jokes out there about economists not agreeing with each other.

"An economist is a person who can tell you what is going to happen next month and then later explain why it didn't happen."
"No matter what position you want to take, you can always find an economist to support you."
"If you ask three economists a question you will get five different answers."

[Puffer Fish]

I've tried to understand the situation, and I'm just going to give my analysis on it.

In my opinion/view, inflation mainly diverts spending power away from the Treasury and to the Central Bank that issues the money. That basically takes "money" out of the government budget, instead using that "money" for the Central Bank to go about trying to manipulate the economy when they are setting their monetary policy.

The mathematics and logic behind this are a little bit complicated, which is why I think most people (and I include economists in that) are unable to see it.

It ends up costing huge amounts of "money" for the Central Bank to set interest rates. (Yes, a lot of you poorly informed people in the public think the Central Bank has power to just order interest rates to be whatever they want. That's not how it works. They actually have to buy up bonds or lend out money if they want to change the going interest rate in the market)
This "money" comes out of the government budget.

(I use the term "money" because it's not really money but spending power, since we are talking about inflation)

Would people really support Central Bank "monetary policy" if they knew how much it was costing them in taxes?

That's the mentality of socialism right there. Government has the power to do anything. Let government solve the problem. (Don't worry about where the money is going to come from)

[late]

That's very biased.

Everyone has a bias.

By itself, that's not an argument. You can also disagree with mainstream economics, but again, you need a good reason why that fits this context.

You just talked about monetary policy, and it was just vague enough that I didn't understand your reasoning why. And you're right, it is complicated, still need an explanation.

Whenever anyone says something that might be construed as disallowing macroeconomics, that concerns me.

[SueDeNîmes]

Wealth doesn't come from money, money is the medium of exchange. Print more money, you just get inflation.

Hold the money supply constant in a growing economy, and you get deflation. Which is why there were frequent deflationary recessions under the gold standard. So the money supply can - and needs to - grow with the economy, which needn't cause inflation if it grows apace with the supply of goods and services.

Besides which, inflation has winners and losers and isn't always bad.

I've tried to understand the situation, and I'm just going to give my analysis on it.

In my opinion/view, inflation mainly diverts spending power away from the Treasury and to the Central Bank that issues the money. That basically takes "money" out of the government budget, instead using that "money" for the Central Bank to go about trying to manipulate the economy when they are setting their monetary policy.

The mathematics and logic behind this are a little bit complicated, which is why I think most people (and I include economists in that) are unable to see it.

It ends up costing huge amounts of "money" for the Central Bank to set interest rates. (Yes, a lot of you poorly informed people in the public think the Central Bank has power to just order interest rates to be whatever they want. That's not how it works. They actually have to buy up bonds or lend out money if they want to change the going interest rate in the market)
This "money" comes out of the government budget.

It doesn't. When the central bank buys bonds from banks, it swaps them for reserves in their reserve accounts at the central bank. The central bank creates the reserves from nothing with keystrokes :

Also, treasury both pays and recieves the interest while the central bank holds its bonds. Which is only "debt" in an abstract accounting sense.

(I use the term "money" because it's not really money but spending power, since we are talking about inflation)

Would people really support Central Bank "monetary policy" if they knew how much it was costing them in taxes?

..What? If central bank asset purchases were tax funded, they'd be neutral or deflationary.

[Puffer Fish]

Hold the money supply constant in a growing economy, and you get deflation. Which is why there were frequent deflationary recessions under the gold standard.

Doesn't that sound like an oxymoron? Maybe I'm missing something, but according to this theory of yours, a growing economy leads to a recession in the economy?

Wouldn't the two forces balance out and establish some sort of stable equilibrium?

I have to disagree with you, because a lot of loan contracts take inflation (or deflation) into account in how much the borrower has to repay. A central bank being able to exert some control over the inflation rate doesn't necessarily solve this problem. It just leads to more speculation. Just like there would be under a gold standard if people were not sure exactly how much deflation there would be.

Besides, let me point out that gold is always being mined from the ground, so that helps counteract some of the deflation, to a small extent. There's a sort of commodity price buffer, if the price starts going much higher, there's an incentive to start mining gold out of the ground in mines where it would not have been profitable at a lower price. We see this with shale oil in the US and Canada. The world oil price went down just a little bit, and suddenly all those shale oil sites weren't profitable anymore.

[Puffer Fish]

Hold the money supply constant in a growing economy, and you get deflation.

So what? Why can't an economy function and thrive with deflation?
So long as that deflation is steady, predictable, and at a stable rate.

[Puffer Fish]

It doesn't. When the central bank buys bonds from banks, it swaps them for reserves in their reserve accounts at the central bank. The central bank creates the reserves from nothing with keystrokes

If the central bank pays the proper going market rate for those bonds, it should not create inflation.

Inflation is not determined merely by the amount of currency in circulation; it's the ratio of the amount of currency in circulation to the ratio of Reserve Assets (held by the Central Bank) backing it. If the Central Bank overpays for those bonds (and they have numerous reasons to, trying to mess with rates in the economy), then it dilutes the pool, and causes inflation.

The same way that a company issuing new corporate stock below the going market rate will dilute the stock price.

(That's just one component of the theory, and it's of course far more multifaceted than that, but you need to get that before you can really understand the fundamentals)

[Puffer Fish]

We pretty much have constant gradual inflation now. If there's nothing wrong with that,

I don't see how constant gradual deflation would hurt anyone.

[late]

So what? Why can't an economy function and thrive with deflation?
So long as that deflation is steady, predictable, and at a stable rate.

Deflation is every bankers worst nightmare. No way would anyone want to start it. It's not predictable, and it's not stable, it's prone to accelerating.

[SueDeNîmes]

@ Puffer Fish, google "why is deflation bad for the economy?"

If you disagree with the arguments and evidence, present counterarguments and counterevidence.

What you've written so far is too confused about both theory and what central banks do in practice.

[Puffer Fish]

Deflation is every bankers worst nightmare. No way would anyone want to start it. It's not predictable, and it's not stable, it's prone to accelerating.

That's not an objective fact, it's an economic ideology.

It's not predictable, and it's not stable, it's prone to accelerating.

You could pretty much say the exact same thing about inflation.

[Puffer Fish]

@ Puffer Fish, google "why is deflation bad for the economy?"

If you disagree with the arguments and evidence, present counterarguments and counterevidence.

Well, I'd point out that you haven't presented any evidence so far that deflation is worse than inflation.

Seems if you're making a claim (i.e. deflation is bad, or deflation is worse than inflation), the burden of evidence should be on you in an argument; not the one questioning it.

You seem to be making the assumption that deflation being bad is an already established economic fact, that nobody questions.

Let me give you a little advice: Just because you read it in economics textbook doesn't mean it's an undisputed fact.

[Puffer Fish]

I think the problem is the issues are so complicated, and some of us are relying on assumptions that they didn't expect anyone else to question.

Saying something doesn't prove it's so, when you're in a debate with someone else, and they are questioning your premise.

Maybe it's time to reanalyse some of your assumptions you take for granted.

[SueDeNîmes]

Well, I'd point out that you haven't presented any evidence so far that deflation is worse than inflation.

Seems if you're making a claim (i.e. deflation is bad, or deflation is worse than inflation), the burden of evidence should be on you in an argument; not the one questioning it.

You seem to be making the assumption that deflation being bad is an already established economic fact, that nobody questions.

Let me give you a little advice: Just because you read it in economics textbook doesn't mean it's an undisputed fact.

No, that'd be tangential to my arguments, i.e. that

- expanding the money supply doesn't necessarily cause inflation

- what you say about central banks and monetary policy is very confused

..which make no assumptions about deflation beyond the fact of it and that central bankers think it's bad. I happen to agree with them for fairly standard reasons which I needn't rehash for your benefit.

[Rugoz]

I feel like something is getting confounded here. What are we even talking about now? Interest, or inflation/deflation, and why?

Are you suggesting that physical money stashed in a vault is not subject to inflation/deflation? Because that is not true.

Eh...I won't start from the beginning. Maybe I'm bad at explaining, google zero lower bound.

I don't see how constant gradual deflation would hurt anyone.

Imagine a deflation rate of 2% and a real interest rate of 1%. It would make holding cash more profitable than investing. It would cause a bank run the central bank can do nothing against, because it cannot control the cost of holding (physical) cash.

Moreover, "constant gradual deflation" is only possible if wages are regularly adjust downwards by expected deflation.

Finally, the economic costs associated with deflation are the same as with inflation.